Supreme Court New South Wales Medium Neutral Citation: In the matter of Alexandria Landfill Pty Limited (No 2) [2016] NSWSC 1671 Hearing dates: Tuesday, 1 November 2016 Date of orders: 28 November 2016 Decision date: 28 November 2016 Jurisdiction: Equity - Corporations List Before: Brereton J Decision: Refer [21] Catchwords: CORPORATIONS – members' rights and remedies – dividend – meaning of "declare" in company's constitution – construction of terms of Shareholders Agreement COSTS – apportionment – where result not involve acceptance of either party's position – where plaintiff substantially succeeded – where severable issue belatedly abandoned by plaintiff – allocation of costs should reflect relative responsibility of parties Legislation Cited: (CTH) Corporations Act 2001, s 254T, s 254V Cases Cited: In the matter of Alexandria Landfill Pty Limited [2016] NSWSC 1503 Category: Costs Parties: BB Retail Capital Pty Limited (plaintiff) Alexandria Landfill Pty Limited (first defendant) Ian Raymond Malouf (second defendant) Representation: Counsel: J R Williams (plaintiff) C J Birch SC (defendants) Solicitors: Gilbert + Tobin (plaintiff) Pigott Stinson Lawyers (defendants) File Number(s): 2015/048739 Judgment 1. In the principal judgment, delivered on 25 October 2016, I summarised my conclusions as follows: [1] [99] The preference shares are entitled to participate pari passu with the other shares in any dividend. The entitlement of the preference shareholders is to participate pari passu with other shares in any dividend, and, to the extent that such dividend is insufficient to provide an 11% return, to have it topped up to 11%. While if the payment cannot be made by dividend it can be accrued as a loan, once there has been an accrual to a preference shareholders' loan account in respect of such a payment, that loan is a separate and additional entitlement to any dividend, and could not be extinguished by a dividend. No dividend can be paid, consistently with the rights of the preference shareholders, unless the amounts accrued on loan account in respect of the 11% minimum cash distribution are first repaid to them. [100] While clause 7.1(b) of ALF's constitution uses the language of "declaration", the power is not one to declare a dividend in the s 254V(2) sense, but – consistently with conventional practice in respect of interim dividends – to make a decision to pay an interim dividend, which is revocable until the dividend is paid, and in respect of which no debt arises until the time for payment arrives. The impugned resolution was not an exercise of a power to "declare" a dividend within s 254V(2), and did not create an enforceable right to payment, let alone to immediate payment. Nor did the impugned resolution fix the amount and time for payment of a dividend, within s 254V(1). However, the impugned resolution was not a mere statement of intent or policy, but a purported partial and incomplete exercise of power under clause 7.1(b). As such, it was a nullity. [101] Were it not a nullity, the impugned dividend resolution at least evinces an intention to pay a dividend in which the preference shareholders will not share pari passu, and without first repaying their accrued loans, but to purport to do so by declaring a dividend in their favour. In each of those respects, it would be inconsistent with the rights of the preference shareholders. For the same reasons, it is oppressive of the preference shareholders. [102] Alternatively, if there were a valid decision that made a dividend payable, the outstanding accrued loans would be immediately repayable. [103] For the foregoing reasons, the plaintiff is entitled to a declaration to the effect that the impugned resolution is void. Prima facie, the second defendant should pay the plaintiff's costs. However, I will if desired afford an opportunity for argument on that issue. In addition, it may be that as a result of these reasons additional declarations may be appropriate to quell further potential disputes. 1. I directed that the plaintiff bring in short minutes on a date to be fixed to give effect to the judgment. Short minutes were brought in on 1 November 2016. To a very large extent they are uncontroversial, and one aspect of controversy evaporated during the argument when the defendants decided not to press for a declaration as to the construction of clause 7.4 of the Terms of Issue in the event of a winding up. The remaining issues requiring resolution are: 1. Whether there should be a declaration (and a consequential injunction) to the effect that ALF may only declare and pay a dividend once it has first paid any loan liability to holders of preference shares accrued pursuant to clause 8.2(b) of the Shareholders Agreement, or whether the words "declare and" should be omitted, so that the relief refers only to payment and not to declaration of a dividend; and 2. Costs. Declaration of payment? 1. The first issue is in essence whether it is permissible for ALF to declare a dividend to be paid at a fixed later date (in accordance with clause 7.1(b) of its constitution), where the accrued loan liability to preference shareholders has not been discharged at the time of the declaration, but is to be discharged prior to payment of the dividend. This possibility could only relate to an interim dividend under clause 7.1(b) of ALF's constitution, as (by operation of (CTH) Corporations Act 2001, s 254V) a declaration of a final dividend under clause 7.1(a) would incur an immediate liability to pay it – whereas on the reasoning in the principal judgment, no such liability would be incurred in respect of an interim dividend until the date fixed for payment, and until then it could be revoked. 2. Clause 7.1 of ALF's constitution relevantly provides: (a) Subject to any preferential, special, deferred or other rights with which any shares may be issued or may from time to time be held, the Directors may from time to time declare such dividends to be paid to members as appear to the Directors to be justified by the profits of the Company. (b)The Directors may declare and authorise the payment by the Company to members of such interim dividends as appear to the Directors to be justified by the financial position of the Company. 1. The plaintiff draws attention to the terms of clause 8.2(b) of the Shareholders Agreement, which permits ALF to accrue the 11% minimum cash return payments by way of loan pending accrual of income by the Company so that a dividend can be declared. On its face, that supports the proposition that it is the declaration (as distinct from payment) of a dividend that triggers repayment of the loans. However, the word "declared" was not used in a consistent manner in the constituent documents. One aspect of the reasoning in the principal judgment is that while in clause 7.1(a) of the constitution, "declare" means "declare" in the strict sense contemplated by s 254V, in clause 7.1(b) it does not, but means "determine" in the sense conventionally used in connection with interim dividends. 2. In the principal judgment, I said (emphasis added): [64] … Moreover, as the company's entitlement to accrue the minimum cash distributions by way of loan ceases when there has been accrual of income … so that a dividend can be declared, no dividend can be paid, consistently with the rights of the preference shareholders, unless the amounts accrued on loan account in respect of the 11% minimum cash distribution are first repaid to them. … [96] As to the alternative argument that the loans are now repayable, there is no dispute that the cash is not presently available to make the payment. Although the clause speaks of "accrual of income", and although sufficient income has been accrued to enable a dividend to be declared (but not to be paid), in my view the preferable construction is that the phrase "accrual of income so that a dividend can be declared" is a composite phrase which describes the state of affairs in which a dividend is declared and payable. It would be contrary to the purpose of maintaining cash reserves that, if the company had accrued in its accounts profit sufficient to enable a dividend to be declared at a date to be fixed, it is immediately obligated under clause 8.2(b) to declare the dividend, giving rise to an immediate obligation to pay the dividend (and/or repay the loans), when it does not have the available cash to do so. [97] On the conclusions I have reached, that state of affairs has not arisen. "Declared" in the resolution does not mean "declared for the purposes of clause 8.2(b)" any more than it means "declared" for the purposes of s 254V(2). However, if there was a valid and effective decision to pay a dividend, then it would necessarily follow that there had been an "accrual of income" by ALF such that "a dividend can be declared". The existence of that state of affairs would bring to an end ALF's permission to accrue the minimum cash distributions on loan account, which would thereupon become repayable. Thus if there were a valid decision that made a dividend payable, the outstanding accrued loans would be immediately repayable. 1. Consistently with the view expressed in [96] of the principal judgment, in clause 8.2(b) of the Shareholders Agreement, "declared" involves the notion of a dividend that is due and payable. In my view, the preferable construction is that clause 8.2(b) contemplated a declaration with a liability to pay. While the payment of an interim dividend would necessarily involve that sufficient income had accrued to enable a dividend to be declared, the mere determination of an interim dividend (with authority to pay on a fixed day, but inherently revocable) could theoretically be made in anticipation of the impending receipt of income prior to the date fixed for payment. However, the requisite income must have accrued by the payment date. 2. To declare a final dividend would be contrary to the terms of clause 8.2(b). Merely to determine an interim dividend would not, but to pay one would be contrary to the intent of clause 8.2(b). Under clause 7.1(b), any interim dividend must be justified by the financial position of the company. That justification must exist when the interim dividend is "declared". However, that does not necessitate that the liquid resources to make the payment are in place. Yet, the financial position of the company may justify the "declaration" of an interim dividend, with a postponed date for payment, if the company reasonably expects to receive sufficient cash to make the payment before the date for payment. That would not be inconsistent with the intent, reflected in clause 8.2(a), that it retain sufficient funds to meet anticipated expenses and prudent reserves. However, to proceed with payment of an interim dividend (and not to revoke it) would necessarily mean that there were sufficient funds. 3. Thus, upon the true construction of clause 8.2(b), ALF may not: 1. Declare a final dividend under clause 7.1(a) of the constitution; or 2. Pay an interim dividend under clause 7.1(b) of the constitution; 3. without first repaying any loan liability accrued under clause 8.2(b) of the Shareholders Agreement. Costs 1. As to costs, in the principal judgment I indicated that prima facie the second defendant should pay the plaintiff's costs, but that I would hear the parties if they wished to contend otherwise. There was no serious opposition to the proposition that, to the extent that the plaintiff was entitled to costs, it was the second defendant who should pay them. However, the defendants made two submissions in opposition to the position indicated in the primary judgment. 2. The first was that this was a case in which the difficulty was created by a complex set of documents which were not easily reconciled, and that the position ultimately reached by the Court did not involve acceptance of the plaintiff's position or the defendants' position, but somewhere between them, and in those circumstances the fair result was that each party should bear its own costs. 3. There is force in the submission that the difficulty was created in part by the complexity and interrelationship of the constituent documents. However, it was also contributed to in no small respect by the unilateral action of Mr Malouf in causing the impugned dividend to be declared in his own favour. This was not a mere construction suit, but contentious litigation in which each of the plaintiff and the second defendant were seeking to propound their respective most advantageous commercial positions. 4. Although it is correct that the Court did not accept the construction for which the plaintiff contended (which would have entitled it to the 11% minimum cash distribution plus a pari passu share in any dividend, whereas I accepted only that it was entitled to a pari passu share in any dividend and, to the extent that such dividend fell short of an 11% return, a "top-up" to 11%), the plaintiff did succeed in obtaining the primary relief it sought, namely a declaration that the impugned dividend resolution was void. There is no suggestion that it could have obtained that result other than by litigating. 5. Moreover, as a matter of substance, while the plaintiff did not succeed in its contention that it was entitled to an annual return of 11% plus to participate pari passu in any dividend, the result that it is entitled to (a) repayment of the accrued loan liability before any dividend, plus (b) pari passu participation in any dividend, and (c) to the extent that (b) falls short of an 11% annual return, a top-up to 11%, is a very substantial improvement on the defendants' position that the plaintiff was entitled only to repayment of the accrued loan liability by way of dividend. 6. For those reasons, it is proper to conclude that the plaintiff substantially succeeded in the proceedings. That supports the prima facie conclusion that it should have its costs. 7. The defendants' second submission was that there was a severable issue which was belatedly abandoned by the plaintiff and in respect of which the plaintiff should not be entitled to costs. While the plaintiff faintly submitted that the Court should not engage in an apportionment exercise, and despite the Court's historical reluctance – which seems to have been at its apogee in common law personal injury actions – to apportion costs between issues, in this day and age costs are an important instrument in controlling the responsible conduct of litigation, and the award of costs inter partes should ordinarily be a representation and reflection of the respective responsibility of the parties for litigation. While it has been said that parties should not be discouraged by costs sanctions from bringing forward all reasonable arguments and issues, in my view it does not incentivise the responsible conduct of litigation if parties are able to litigate on the basis that they can have a "free kick" on issues on which they fail, just because they succeed on one decisive issue. 8. The defendants submitted that the plaintiff raised – by paragraphs 29, 30 and 35 of the Amended Statement of Claim – an allegation which was not formally abandoned but was not pressed, that the distributable profits of ALF did not justify the impugned dividend, and – by paragraphs 48 and 49 – an allegation, later abandoned, that the impugned dividend contravened Corporations Act, s 254T, in that ALF did not have the requisite net assets to justify it. Moreover, to respond to those allegations, the defendants obtained, at a cost of some $122,000, an expert report to demonstrate the financial adequacy of ALF's position to justify the dividend. Although the plaintiff supported the retention of paragraphs 29, 30 and 35 on the basis that they also supported a contention – presaged by paragraphs 27 and 28 – that in truth and substance the impugned dividend was not an interim dividend at all, that case also was not developed (though it was not abandoned) at the hearing. 9. The force of the defendants' submission is that until trial they were in substance required to defend, including with expert evidence, a case which was effectively abandoned, that the financial position of ALF did not justify such a dividend. There is no doubt that, at least until shortly before the hearing, the defendants were required to meet a case which was directed to the insufficiency of the financial positon of ALF to justify declaration of the impugned dividend, and that that case was abandoned. While that issue occupied no time at the hearing, there is no good reason why ALF should have to bear the costs of litigating it until it was abandoned. 10. Having regard to the overall success of the plaintiff, but its abandonment of the s 254T and related issues, and its less than complete success on other issues, it seems to me that responsibility for the costs of the proceedings should be apportioned 80% to the second defendant, and 20% to the plaintiff. Netting those off, the second defendant should pay 60% of the plaintiff's costs. Orders 1. Accordingly, I make orders as follows: 2. The Court declares that: 1. The resolution passed by the Second Defendant (Mr Malouf) as sole director of the First Defendant (ALF) on 28 November 2014 that ALF declare (but not pay) an interim dividend of $24,434,678 to Mr Malouf as ALF's sole ordinary shareholder is void and of no effect. 2. Upon the true construction of the constitution of ALF, the Deed Poll dated 5 January 2009 issued by ALF and others including the Terms of Issue in Schedule 1 thereof, and the Shareholders Agreement dated 1 January 2013 between ALF, Mr Malouf and ALF's preference shareholders (Shareholders Agreement): 1. ALF may declare a dividend under clause 7.1(a) of its constitution, or pay an interim dividend under clause 7.1(b), only once it has first discharged any existing loan liability to holders of A Class preference shares which has been accrued pursuant to clause 8.2(b) of the Shareholders Agreement; 2. A Class preference shares in ALF are entitled to participate pari passu with all other shares in ALF in any dividend declared or paid by ALF, in addition to the right of the holders of preference shares to be paid any sum that has been accrued as a loan liability pursuant to clause 8.2(b) of the Shareholders Agreement. 3. Subject to (a) and (b), any dividend paid in respect of A Class preference shares in ALF will satisfy pro tanto the entitlement of the preference shareholders to the payments provided for in clause 8.2(b) of the Shareholders Agreement, and if the dividends so paid in any relevant period are insufficient to provide a minimum annual return of 11% as provided for in clause 8.2(b), then to the extent of the insufficiency ALF is obliged to make an additional payment of, and/or accrue as a liability to the preference shareholders on loan account, an amount or amounts which together, when added to any dividend, provide an annual return of at least 11% to the preference shareholders. 1. The Court orders that: 1. ALF be restrained from declaring any dividend under clause 7.1(a) of its constitution, or paying any interim dividend under clause 7.1(b), in which shares other than the A Class preference shares participate, unless: 1. It has first discharged any existing loan liability to holders of A Class preference shares which has been accrued pursuant to clause 8.2(b) of the Shareholders Agreement; and 2. The A Class preference shares in ALF participate in the dividend on a pari passu basis. 1. Mr Malouf pay 60% of the plaintiff's costs of the proceedings. ********** Endnote 1. In the matter of Alexandria Landfill Pty Limited [2016] NSWSC 1503 at [99]-[103], Amendments 02 December 2016 - Correction to hearing date DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 02 December 2016